Every company should think often about the threats and opportunities facing it over the next few years. It is easy to be too narrowly focused, considering only how to protect or gain market share, so look sometimes at the big picture. What if changes mean your whole industry is in danger? When you next think through the future of your industry, one of the best questions you can ask is:
If it didn’t already exist, would we need to invent it?
If the answer is no, you shouldn’t be worrying about your market share, but about your escape plan.
Let’s address the question at banking, topical as The City is threatened by proposed changes in EU regulation and our government is rightfully fighting to protect the income coming into the UK. Nevertheless, I think that if we didn’t already have the banks, we would have no need to invent them. Do we need banks? No.
Banking earns a lot of money, but ultimately it comes from other companies and individuals (though many are overseas). It is a drain on the rest of the economy, skimming off generous profits from everything it touches. Nice for bankers, but bad for everyone else. If we can find a way of providing banking services without the high costs, most of us would be better off.
In fact it isn’t just banking but financial services generally that are affected. Banking, insurance, pensions and so on are all essential to today’s everyday life, but that doesn’t mean their current implementations are the best way to provide them. Financial services don’t directly add to overall global wealth, but they do facilitate many things that do. They are valuable, even essential, but they could now be provided by alternative systems at much lower cost, so we could still get the services, but keep our money. With lower operating costs, the rest of the economy would benefit.
The UK is in a position that it benefits greatly from an industry that isn’t needed, but without which the world as a whole would be better off. The UK’s most cost effective (though selfish) strategy would be to delay its downfall and milk it while it lasts, while still encouraging its replacement within the UK.
All of the services that banks and other financial services provide today could be provided far more cheaply via social and business networks, transactions executed securely in the cloud. This ‘could’ is heading rapidly towards reality already with development of online payments, social networking sites, smartphones and expectation of secure connections.
With easy transfer of money or other financial tokens directly between devices, or across the cloud using Paypal or its descendants and competitors, we are on a good position now. Social networking allows communities to build for self banking or self insurance. It doesn’t take very much to add on the required security and integrate the electronic payments and databases. Secure social networks could then bypass banks for secure storage of money, record keeping, transactions, savings and investments. Linking people direct to others who can lend them cash is one thing, but someone needs to verify their trustworthiness. We should expect that such services will often be provided by the very fabric of the social network. If someone is a friend or a trusted friend of a friend, then you may be willing to take a risk on them. If you don’t know them, then this is a perfectly valid financial service that can be offered by freelance risk assessors and loss adjusters.
So we should watch out for social networks that are establishing networks that are based on trust and know identity. I wouldn’t consider lending to someone with an anonymous user ID. I need to know who they really are and how to get hold of them should anything go wrong. I suspect that in this role, derivatives of Google+ will fare far better than the likes of Facebook.
It won’t be easy to bypass the banks, but companies or web communities will find it easier and easier as the technology gradually develops over the next few years. Banks are in a good position for now, and there is no reason to leave them just for the sake of it. If they offer good service at reasonable price, some at least will probably stay in business. But complacency is never wise. They now do face real existential threats and should be preparing for new competition coming from outside their own community.
Whether we should protect banks or encourage companies to develop ways to bypass them is an interesting question. Competition doesn’t always deliver better services and no solution is ever without its problems. But although they may do a great job at least in some areas some of the time, banks do syphon off a great deal from the economy, and it is possible that we might be able to do something better with that cash. Personally, I really am not sure where the balance lies, but the possibilities are certainly intriguing.